TabbFORUM: A Pathway to Compliance for Illegal ICOs?December 4th, 2018

Many digital coins were issued in violation of SEC regulations, and many ICO investors are now in legal limbo, stuck with billions of dollars in coin investments with no way to exit. A recent statement from the SEC, however, points to a possible pathway for issuers and market professionals to bring digital asset offerings into compliance. Vincent Molinari, Co-Founder of Templum Markets, shares his insight on compliance in digital assets.

On Nov. 16, the SEC issued a timely and vital statement regarding Digital Asset Securities Issuance and Trading. The statement underscores regulators’ expectations that issuers, broker-dealers and exchanges must comply with existing Federal securities laws when dealing with blockchain-based innovations such as Initial Coin Offerings (ICOs) and digital assets. Less than a year since cryptocurrency prices plunged from their lofty 2017 highs, the Commission’s statement points to a possible pathway for issuers and market professionals to bring digital asset offerings into compliance.

Many of the ICOs completed in 2017 and 2018 resulted in coins being issued to investors in violation of existing U.S. Federal and state securities laws due to incorrect assumptions that these offerings were “utility” tokens sold to investors outside of the SEC’s purview. This assumption has been disputed by the SEC on multiple fronts over the course of 2018, including enforcement actions and public statements such as Chairman Clayton’s guidance from December 2017, in which he cautioned Main Street investors and market professionals about the potential illegality of cryptocurrencies, ICOs and some of the markets in which they have traded. This guidance was consistent with Templum’s view that most, if not all, ICO offerings should be treated as securities offerings under the Howie test, a position we made clear in a March 2017 SEC rulemaking petition.